“We need to develop some new instruments, which sit somewhere between interest rates, which affect the whole economy… and individual supervision and regulation of individual banks. We need to develop something which bridges that gap and directly addresses the financial cycle and prevents the financial cycle and the credit cycle getting out of hand.”

The Bank of England was warned that “crazy borrowing” was taking place during the boom years — but did nothing about it. Partly due to politicas, partly due to their failure to understand the severity of the problem. They did not understand how much the banks had abdicated lending standards, and how that led to a financial crisis.

Sir John Gieve said the Bank’s policy-makers were well aware that dramatic rises in the price of houses and other assets were unsustainable, but still underestimated the danger this posed to the long-term health of the economy.

In a television interview Sir John, who sits on the interest rate-setting Monetary Policy Committee, said that rate changes were a “blunt instrument” and admitted that the Bank’s power to alter them was not enough to control the economy.

Sir John, who is charged with ensuring financial stability and was heavily criticised last year by the Treasury Select Committee for apparently failing to control the Northern Rock crisis, admitted that taxpayers may not get all their money back from the bail-out of the bank and other institutions.

He said: “There are some books – Northern Rock, Bradford & Bingley – which the taxpayer’s now holding, which clearly have a level of defaults in them, [I'm] not quite sure how that will balance out against the residual of the capital.

“As for the more mainstream banks, yes I think they’ve got a commercial future and I’m sure that in time they will … revive and start building and growing as commercial entities again.”

Funny, there is no Fannie Mae, Freddie Mac, or CRA in the UK. However can we explain mtheir boom, bust and credit collapse?

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

while I mean not to step on any, potential, poetic usage of yours, it ain’t a ‘Theme’, it’s a Script.

A better Claque of Characters, one couldn’t ask for, Central Casting has well, and duly, earned their keep..
~
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Yes, securitization was to blame at that could be pinned on investments bankers. But someone had to be buying MBSs and FNM and FRE did play a part in that.
[BR: Not until late 2005 — prior to that, they could not buy sub-prime.]

As a transplanted Englishman, I think we are seeing parallel problems in both countries. Northern Rock = Countrywide. RBS = Citigroup. It’s all the same stuff. What is interesting is that this happened almost simultaneously in the US with a neo-conservative regime and in the UK with a slightly left-center government.

So I think a lot of the political demagoguery is totally out of place in the analysis of what is essentially a pure economic problem related to easy money policy. Once Peak Credit was reached, the outcome was always going to be a pronounced deflation that is insensitive to the political leanings of any government. How long and how deep are the deflation? This depends on monetary policy, and again this has little to do with political ideology.

“We need to develop something which bridges that gap and directly addresses the financial cycle and prevents the financial cycle and the credit cycle getting out of hand.””

Dear Sir John,

Please don’t take the ups and downs of the economy and market out of the equation; read “Road to Serfdom,” by Friedrich von Hayek, rinse and repeat! Only true open, honest and transparent markets can determine the proper allocation of resorces.

Must we go down this road again? When the hell are the supply-siders and keynesians going to get it? Feed and shelter the people when they are down, but let the market work for those who desire more.

The Centre for the Study of Global Governance
is a leading international institution dedicated to research, analysis and dissemination about global governance. Based at the London School of Economics, the Centre aims to increase understanding and knowledge of global issues, to encourage interaction between academics, policy makers, journalists and activists, and to propose solutions.

The Centre, established in 1992 by Professor Lord Desai, has pioneered research into globalisation. Today it is led by co-directors Graham Wallas Professor of Political Science David Held and Professor of Global Governance Mary Kaldor.

HQ’d in London, whowoodanode? saves on Flying, no?

The Bank of England is the central bank of the United Kingdom. Sometimes known as the ‘Old Lady’ of Threadneedle Street, the Bank was founded in 1694, nationalised on 1 March 1946, and gained independence in 1997. Standing at the centre of the UK’s financial system, the Bank is committed to promoting and maintaining monetary and financial stability as its contribution to a healthy economy.http://www.bankofengland.co.uk/about/index.htm

@leftback, I think you have a good point; this was something that was bugging me on a thread a week or two ago.

It is pretty clear that blaming the CRA is complete nonsense. However, as much as I would like to lay the blame at the footsteps of GW Bush, Worst President Ever, I think the UK boom/bust tends to take the starch out of my argument a bit.

The pound sterling’s namesake, 12 troy ounces fetches $123.72 at today’s closing Comex.
A silver dollar, unavailable from the Mint can be found on Ebay for twenty. Correlation
is not causation but the US and Britain do share that in common. Because all societal and
political forces conspire on the side of the temptation for a free lunch, the independent central
banks are to be the watchdogs over currency and price stability. Given the fresh outbreak
emanating from the CDC, the Center for Deflation Control, an epidemic of quantitave easing,
it seems the watchdogs have become the foxes peddling Kentucky Fried out the henhouse
window. Robert Mundell has some suggestions for the lonesome medium of exchanges,
bereft of their requisite traveling companions unit of account and store of value.

True Whammer, but then you factor in the debacles of Iraq, Afghanistan, Katrina, torture, Guantanamo, and a whole host of others I won’t get into because I don’t think it’s necessary to make the point, and W is still by far the worst president this country has ever had.

Obviously W. is the worst modern US president. Is Tony Blair the worst modern UK PM? Forcing the country into the messs in Iraq and financial failure. Soon the pound will be lower than the Euro. I thought the UK would have abandoned the pound for the Ecu standard back in early 90s. Will you finally make up your mind about joining Europe or US? You can’t be special friends to everybody. Clearly central Europe can manage without the UK, the UK has been on a slippery downwards slope since WWI. Isn’t it time to focus on rebuilding the industrial base again? The financial center has moved to Frankfurt.

Letting the market set interest rates sounds ideal, per Hayek. But exactly what went wrong with oil and gas prices this year. Everyone should have known those prices were not sustainable. Not with healthy economies.

I wish I could remember the exact history. Seems to me monopoly was a big deal some time back during the Depression. People in power were setting prices.

Speculating. I find it very scary, and un-free market, that oil prices can rise so IRRATIONALLY. Unless rational thinking has to do with a few players pushing global prices where they want them.

I am going to guess, once again, that SMART MONEY bailed leaving dumb money to pick up the pieces.

In our reality, there is no such thing as a free and open market. We live in a world of billions of people where the wealth and power are controlled by an amazingly small number of people. And those few want more not less.

True, the few in power want more not less. Having said that, the central banks give the few in power even more chance to manipulate the open market. Getting rid of the central banks and letting the markets set rates will take away some of their power. Why leave rates too low for too long? The open markets would not allow it to happen as long as the central banks did.

The blunt instrument he needs is some realistic modern measure of M. It used to be understood – the amount of M was a big deal. M now includes money created by every storefront mortgage lender, every 60 to 1 hedge fund leverager and every tacky credit card issuer. When there is too much credit issued, it cannot be paid back – that is a pretty fundamental basic truth. But today we pay no attention to how much credit is floating around. If everybody on earth committed themselves and 2 more generations to a lifetime indentured servitude we would chalk it up to a fantastic GNP and bankers would dance in the streets.
There is a certain point where debt rises too high and we have a credit collapse, debt-deflation, call it what you wish, and no modern economist seems to have a clue where that level is… and we all suffer for their ignorance.

I write a UK financial focused blog Capitalists@Work. The UK too had a huge property boom just like the US and also, whatever Super Trooper may assert, has the world financial centre in London; home of securitisation. As such, when the property credit bubble collapsed the UK was left nursing huge losses at its Banks. All of whom had gorged on CDO’s, CLO’s and the rest. The Financial Services sector was also 35% of the UK economy. It’s collapse is really hurting.

As to why we did not need Fannie mae etc, the answer is the Socilaist government just loved all those extra tax revenues from banks and oil companies these past years, and no doubt they enjoyued the banking lobbyists no expense spared approach. It has employed over a million extra state workers to non-jobs for the most part and has won 3 elections on the back of this strategy. State workers in the Uk almost all vote Left (labour).

Finally, in 1997 (when labour came to power) the UK split regulatory Governance between the bank of england, the Government’s Treasury department and a new organisation called the FSA. Confusion has become the norm as these three agencies argue about who is in charge of what and who has regulatory oversight where. The net effect is they dropped the ball big time between them.

And so come 2009, the UK finds itself saddled with terrible problems.

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About Barry Ritholtz

Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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